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We consider the 2016 regulatory changes are very significant for companies that fall under the definition of “public interest entities” and extend well beyond the narrow audit relationship. We believe there are a number of key issues boards should be addressing as follows:

1 Board and committee composition

The reforms require companies to have audit committees which have competence in their commercial sector and which include at least one member competent in audit or accounting.

Boards may wish to reconsider the breadth of experience of the board’s members as a whole as well as those of their current audit committees, needs for continuing board education and training and succession plans in the light of these requirements. It should be noted that there are restrictions on appointing alumni of audit firms to boards.

Boards and CFOs will wish to review the services they receive from professional accountants, and, in the context of mandatory periodic audit tendering, understand early which services they are already receiving from professional services firms.
The board will also normally wish to establish a professional services procurement strategy, considering potential independence issues in respect of the next audit tender, but also, and just as critically considering other important services, such as taxation advice, corporate finance work or consulting that may be equally important relationships for the company. For example a firm you might wish to retain indefinitely for important input into the company’s tax affairs would be ineligible for a successful audit tender. Many companies are finding that with multiple firms providing such services their potential choices of auditor are, in effect, quite limited and that they do not have prior relationships with sufficient candidates to enable them to make properly considered decisions.

3Practical implications for audit committees and boards around tendering

The very prescriptive nature of the reforms put a burden on boards (and audit committees) to take great care in the processes around audit tendering and appointment.

Boards will need to establish when they need to tender and/or rotate their audit, in the light of complex transitional arrangements. They will need to consider the timing, form and duration of any tender process giving attention to the EU requirements for the process to be open to a range of firms and based on transparent criteria, and for the board to consider two firms recommended by their audit committee. The establishment of appropriate criteria, the considerations of the degree of access candidates might have and the time involved in settling on a robust process should not be underestimated and will require project management. Boards may wish to consider taking soundings from other stakeholders, such as major investors, prior to selecting firms to tender.

Audit committees are now responsible in law for monitoring auditor performance. This covers not only assessment of the quality of the audit itself, but also ensuring audit independence is preserved against both financial and scope of service criteria, as well as giving consideration as to whether auditors meet their formal reporting requirements. These express responsibilities make audit committees very directly accountable to shareholders (and to regulators) in a way they were not before and will involve more time, effort and process than will often have previously been the case.